Ross Students Turn Bearish On Pandora

At the Ross School of Business I teach a class on stocks and portfolios, and students pitch stocks in that class. What stocks do they like and what stocks do they dislike?

Each semester, students take my Quant/Value Portfolio Management class. During the semester they learn about quant screening, testing quant strategies, valuation, risk analysis and items relating to portfolio management. In one project, they screen for stocks and then they run the stocks through a series of valuation exercises to determine a target stock price. For the valuation, the students look at:

After looking at all these models, the students find a range of price targets. This is part science and part art, as different assumptions and different models give different prices. If one wonders why analysts don’t always agree on the same price, it deals with the idea that different folks use different metrics in their models. For the project, I can’t judge a student’s opinion on a stock price, as we won’t know until later on if they are right. I can judge a student as to whether or not they used all the required tools to get a target stock price.

My students are quite aware that I would publish their stocks and stock prices, and so I am not breaking any sort of confidentiality with the students.

The students were able to choose any sector and almost any stock, and I found it fascinating that two student groups pitched Pandora as a short, but with different target prices. One group felt that it was worth $10 and another group felt that it was worth $16. Why were they bearish on Pandora?

One group had a $10 target price and they stated:

We recommend Pandora as a short sell due to several potential catalysts that will drive the stock downward. It is susceptible to negative earnings surprises due to strong competition and slow user growth, as well as a likelihood of analysts downgrading current ratings. Some of Pandora’s top insiders have reduced positions, and the primary shareholders are Growth and Aggressive Growth large-cap funds who may reduce positions given a change in growth sentiment. Our valuation analysis implied an average price target of $10, representing ~50% downside from its current price. Across several quant screens, Pandora has consistently scored poorly

Another group with a $16 target price added:

We are initiating coverage on Pandora Media Inc. with a “Sell” recommendation. Pandora operates in the internet radio space. Through two separate quant screens, we identified the stock as a poor performer in the information technology sector. Our target price is $16.00, a 17% drop in price, supported by seven different valuations. Additionally, some insiders have decreased their position in the last 6 months. Pandora lags behind its peers on Bloomberg’s relative rotation graph. Catalysts for a price decrease include; increased competition and substitutes for Pandora’s internet radio service, decreased growth in users, loss of support from music companies and artists.

These are the stocks that were pitched on November 3rd. Listed are some metrics courtesy of FactSet.

Petainen is a trading floor manager at the Ross School of Business, where he helps teach a number of classes on valuation, portfolio management and quant screening. Petainen is featured in Matthew Schifrin’s book, The Warren Buffetts Next Door. Petainen teaches students abo...